Bcause LLC, the failed cryptocurrency trading platform and mining services provider, was back in court on Friday, June 21, on a motion by WESCO, a secured creditor, to be paid now, before the remaining cash in the enterprise is dissipated. WESCO’s demand for payment precipitated the April 11, 2017, bankruptcy petition. Bcause and seemingly most of its creditors want the company to continue operating its mining services rather than be liquidated. If WESCO prevails, the company’s remaining cash will be drained and it may be forced out of business.
Friday’s lengthy testimony provides a detailed look at how Bcause slid into bankruptcy.
The tale of two cities
Bcause is headquartered in Virginia Beach, Virginia, where it also has its main operations (which are limited to supporting cryptocurrency mining) and the company founders reside. The company also has an office in Chicago, Illinois, that is the center for the trading business development. Trading and clearing have not launched. Mining would enhance the sexiness of the exchanges; the regulated trading and clearing businesses were to lend legitimacy to the mining operations. Mining is Virginia Beach, and trading is Chicago.
In 2018, Bcause spent about $35 million, $33 million for mining and $2 million for the trading and clearing business lines. Tom Flake, Bcause’s Virginia Beach-based treasurer and acting CEO, was involved with the mining operations, while Fred Grede, the company’s Chicago-based CEO until about a month ago, struggled to fund the company’s trading and clearing businesses.
After working for Bcause for about two years, Grede testified that he felt relieved when he received an email from the chairman of the Bcause board saying his services were no longer needed. During a previous court hearing, Bcause’s attorney had blamed Grede and other Chicago-based senior managers for the company’s current problems. Flake said Grede was fired because he had not terminated the Chicago employees he was directed to fire after the bankruptcy filing.
Grede said his dismissal was the result of different tensions from the ones Flake named, one of which was caused by Grede’s attempts to fire Flake for the previous six to nine months. Grede testified that Flake’s conduct with the company’s biggest customers had caused them to refuse to deal with Flake. He also said Flake had continuous conflicts with Chicago based managers. Grede said he did not succeed in terminating Flake the one time he brought the matter to the Bcause board because Flake was not only a founder but also a Virginia Beach-based member of the board. Grede noted that the largely Chicago-based independent directors of the company have stepped down from the board due to concerns about ethical issues stemming from actions by Virginia Beach-based board members.
Despite being CEO, Grede said he had problems with controlling spending by the Virginia Beach operations. When the company’s only bank, which was in Virginia, became reluctant to bank for a cryptocurrency business, Grede moved the bank account to Lakeside, a Chicago bank where he got more control and transparency into company spending. From both Flake’s and Grede’s testimonies, it appeared that Virginia Beach capital expenditures ran much higher than expected due to problems with the physical plant. Late last year, Grede hired the Bcause’s first chief financial officer, George Sladoje, to control finances better. Sladoje was terminated after the bankruptcy, but Flake said he had recently been in discussions with Sladoje to bring him back to the company.
Grede also testified that the non-mining parts of the business were constantly underfunded as a result of the mining business’s cash needs. Grede noted that Bcause’s trading and clearing software provider, Nasdaq, is owed approximately $750,000 and Nasdaq is not willing to let Bcause operate the trading system before it gets paid.
Doubting that he will be repaid, Grede said he is an unsecured creditor for about $600,000 as well as an equity investor. Flake testified that he has invested about $20,000 in the company, but didn’t say whether he is a creditor.
The company today has debts of about $14 million, $4 million of which is in arrears. Since launching its current organization in October 2017, Bcause has operated a mining farm in Virginia Beach. (A bitcoin “farm” provides the infrastructure and services for mining operations owned by third parties. Bcause does not mine bitcoin for its own account.)
Hosting approximately 14,000 mining machines, Bcause has six customers, the only customers it has ever had. Three of them account for 95% of Bcause’s business. All customers have two-year agreements which begin to run out late this year. The contracts are fixed price agreements which at the current level of business generate operating profits of somewhere between $40,000 and $75,000 per month, depending on accounting. These major mining customers are SBI, also an equity investor, BMG, also a major debtor, and St. Bitts, a mining business associated with Roger Ver, a bitcoin celebrity and Bitcoin Cash enthusiast known as “Bitcoin Jesus.”
Bcause sought plans for both a spot cryptocurrency trading platform and a futures exchange with clearinghouse, but they were never launched. Spot cryptocurrency markets must be registered with FinCEN and, depending on the nature of the business, with a web of state money transmitter licensors. Flake provided testimony that some of these registrations had been obtained already.
The futures market and clearinghouse would be subject to regulation by the U.S. CFTC, whose website shows that Bcause’s futures market application has been pending since 2016. There is no indication that it has accepted Bcause’s clearinghouse application.
In early May 2019, Flake told CoinDesk that it was planning to launch spot trading later that month. Grede’s testimony indicated, in fact, that none of the required state money transmitter licenses and business registrations was in place in May. On Friday, Flake told the court that it wants to launch spot trading in August. In his subsequent testimony, Grede doubted that any state would permit a company in bankruptcy to operate as a money transmitter.
Bcause sought bankruptcy protection on April 11, at which time its operations were cash-flow positive. It was using much, but not all, of its cash to pay its electric bills. When WESCO demanded payment, Bcause sought bankruptcy protection so it could continue to provide services to its six customers. The current motion seeks to pay WESCO ahead of other creditors. Bcause, the debtor, and the other creditors want to see WESCO demoted to the status of unsecured creditor (“Get in line!”) and Bcause allowed to continue its operations in order to maximize the repayable sums. There is, however, considerable uncertainty about how long its current clients will continue doing business with it.
Japan’s SBI Holdings, the former subsidiary of Soft Bank, and St. Bitts have indicated that they are likely to terminate their contracts with Bcause when they expire, according to Grede. BMG, the other major customer, has a more uncertain outlook.
BMG provided an $8 million construction loan last October, about half-way into its original contract’s term and reportedly extended its mining commitment to four years. BMG is represented in court by counsel. Even Grede seemed surprised when it emerged that the loan and contract extension may not have been recorded in writing. If true, that is a major lapse that may mean BMG will not be treated as a creditor by the court. In that case, BMG would be less likely to renew its services contract with Bcause.
Flake said he did not know whether those three major customers would extend their contracts. This is reasonable when you remember that they reportedly would not talk with Flake.
Flake testified that once it launches its cryptocurrency trading platform, Bcause will become successful and enjoy a market value of “hundreds of millions of dollars.” Its unique selling point is that it will be a better operating marketplace than other trading platforms, mimicking regulated derivatives markets’ adherence to rules-based trading. Flake also said Bcause might start mining for its own account.
According to Grede, starting a spot market for cryptocurrency will be impossible due to Bcause’s status in bankruptcy. He said he doubts that a company in bankruptcy would be able to attract the new investors Bcause needs for launching and that the states would not grant the necessary money transfer licenses and business registrations. “What customers,” he asked, “would deposit funds or cryptocurrency with an entity in bankruptcy?” Furthermore, according to Grede, Bcause owes Nasdaq about $750,000 for the trading system and it is not likely to let Bcause operate before it pays that amount.
The current motion is limited to WESCO’s payment. For the court to deny the motion, it has to find that the debtor and other interested parties have demonstrated that a feasible plan for Bcause’s successful emergence from bankruptcy exists. The hearings on the motion continue Monday and will likely be extended beyond then.
Bcause’s plan for resolving its bankruptcy must be filed in August.
Editor’s Note: The author was a consultant with Bcause in 2017. John Lothian Productions was hired by Bcause for video work in 2017. Neither are creditors in the bankruptcy case.
Edited by Sarah Rudolph